Reverse mortgages, which have been touted as a great way for seniors to live well in their retirement years, may in fact be putting their financial security at risk, according to ASIC.
In a new report, the corporate watchdog says banks are granting reverse mortgages to seniors without checking whether borrowers understood the future costs of their loan.
This in turn could impact their ability to afford their possible future needs such as aged care, it said.
For older Australians who own their home with few other assets, a reverse mortgage can allow them to draw on the wealth locked up in their homes, while they continue to live in them.
ASIC reviewed data on 17,000 reverse mortgages, 111 consumer loan files, lender policies, procedures and complaints. It also commissioned interviews with 30 borrowers and consulted more than 30 industry and consumer stakeholders.
It found lenders have a clear role to play and need to do more: for nearly all of the loan files it reviewed, the borrower’s long-term needs or financial objectives were not adequately documented.
Importantly, under legal protections in place since 2012, borrowers can never owe the bank more than the value of their property, and can remain in their home until they die or decide to move out.
Lenders and brokers need to make inquiries that would lead to a genuine conversation with customers about their possible future needs...
But depending on when a borrower obtains their loan, how much they borrow and economic conditions (property prices and interest rates), they may not have enough equity left for longer term needs.
“Reverse mortgage products can help many Australians achieve a better quality of life in retirement,” said ASIC deputy chairman Peter Kell. “But our review shows that lenders and brokers need to make inquiries that would lead to a genuine conversation with customers about their possible future needs, not just a set of tick boxes on a form.”
National Seniors Australia senior officer Basil LaBrooy said products such as reverse mortgages are an important means for many people to provide themselves with an income stream or capital in later life.
“It is vital that a prospective borrower has a sound understanding of the product and the risks associated before they commit to use it,” Mr LaBrooy said.
“Providing for possible future needs is important, but being able to live life with dignity is too.
“Industry groups are working to ensure all who work in this arena abide by best practice and ensure the consumer is well serviced.
“National Seniors Australia … provides this information to its members and independence is guaranteed as it has no product/s to sell, nor does it make any recommendations.”
Homesafe Solutions, meanwhile, offers an equity-release product that is neither a loan nor a reverse mortgage. It enables senior homeowners to access the wealth tied up in their homes by selling a share of the future sale proceeds of their home.
“Rather than taking out a capitalising interest loan and then carrying the risk of future property growth rates as the debt increases, with Homesafe the homeowner can sell a part of their home today and protect a share of the future equity in their home for their own needs or to leave to their estate,” said Homesafe general manager Dianne Shepherd.
It’s tight in the bush
MR LaBrooy said seniors in rural and regional Australia are finding it harder and harder to obtain mortgages, owing to restrictions on the size and types of properties that can be used for security.
“It’s a big issue for those retirees who have legitimate reasons for tapping into the equity in their homes,” he told website Banking Day. “As more lenders have withdrawn reverse mortgage products it has become terribly difficult for rural homeowners to release equity in their properties.”
In the past year, Westpac and Macquarie have vacated the reverse mortgage market, leaving fewer organisations to meet national demand.
Mr La Brooy said rural and regional housing properties were typically valued significantly less than urban dwellings, meaning lenders were less willing or able to approve loan applications from retirees in the bush.